Wealth Fluctuations and Risk Preferences: Evidence from U.S. Investor Portfolios
85 Pages Posted: 18 Aug 2020 Last revised: 22 Feb 2022
Date Written: July 15, 2020
Using data on the portfolios and income of millions of U.S. retirement investors, I find that positive and persistent shocks to income lead to a significant increase in the portfolio equity share, while increases in financial wealth due to realized returns lead to a small decline. The positive net effect in the data is evidence for risk aversion that decreases in total wealth. I estimate a portfolio choice model that matches the reduced-form estimates with a significant degree of non-homotheticity in risk preferences. Decreasing relative risk aversion preferences significantly increase the share of wealth at the top of the distribution.
Keywords: Household Finance, Portfolio Choice, Risk Preferences, Life-Cycle Model
JEL Classification: G11, D14, D31, E21
Suggested Citation: Suggested Citation